Obama's European Trade Deal Could Completely Reshape Global Exports

The blockbuster bid for a U.S.-European Union trade deal
announced by President Obama in Tuesday’s State of the Union
speech won’t be easy, but it has the potential to reshape the
global export market and provide a nudge to economies on both
sides of the Atlantic.

The U.S. and European Union together already account for nearly
half of global GDP and a third of global trade flows, with some
$2.7 billion worth of goods and services exchanged daily. The
agreement would increase trade between the partners by $120
billion within five years, according to a study by the U.S.
Chamber of Commerce. At the same time, it would add some $180 billion to U.S.-EU gross
domestic product. Estimates put forth by the European Commission suggest a new trade pact
could increase annual GDP by 0.5 percent in the EU and 0.4
percent in the U.S. by 2027.

Getting even those modest benefits may be tricky, though.
Negotiators striving to reach a deal within an aggressive
two-year time frame will have to sort through a host of different
regulatory standards, particularly regarding food and
agriculture. As The Fiscal Times columnist
Patrick Smith outlined recently, the EU’s regulatory regime
is infinitely complicated, and progress in Brussels often moves
at a snail’s pace. Europe has higher environmental standards and
more restrictive regulations for many products, including
pharmaceuticals. Obama administration officials have decried EU
laws regarding data privacy as “digital protectionism” for European providers
of cloud-computing services. There are also concerns about
Europe’s soon-to-be-implemented financial transaction tax that
will impose new liens on financial dealings in 11 European
countries, including Germany and France.

Food Fight

The biggest sticking points, though, are bound to be the large
cultural and regulatory differences in food standards. The EU has
banned genetically engineered crops and importing beef treated
with hormones. It also adheres to a “precautionary principle”
that restricts food imports until strong scientific evidence
proves they are safe. The U.S., by contrast, generally requires
some scientific evidence of harm to ban foods, says Edward Alden,
a senior fellow at the Council on Foreign Relations specializing
in U.S. economic competitiveness. As a signal that it would be
open to lowering barriers on food imports, the EU agreed this
month to lift its ban on live pigs and beef carcasses washed in
lactic acid.

The concerns aren’t only on the European side. Some lawmakers on
Capitol Hill are already pushing back against some of the
provisions that a final agreement will likely contain. In
a letter to U.S. Trade Representative
Ron Kirk
this week, Sens. Max
Baucus, D-Mont., and Orrin
Hatch, R-Utah, wrote that opening up European markets to
American agriculture would be key to securing approval for any
trade deal. They also pointed to a need for agreement on strong
intellectual property protection.

Given those thorny issues involved, Frances Burwell, vice
president of the Atlantic Council and director of the council’s
Program on Transatlantic Relations says that the two-year time
frame for the deal is ambitious, and that some areas of
disagreement will be difficult to iron out. “It may be as we
proceed through the negotiations, there are some persistent
disagreements going on between the United States and the EU,” she
said. “But these disputes impact less than 2 percent of our
trade. Do you hold up the whole thing for 2 percent, or agree to
disagree on those?”

Those persistent obstacles scuttled any chance for a deal in the
past, but economic weakness on both sides of the Atlantic now
provides fresh incentive for political leaders to push ahead,
even if the path is strewn with potential stumbling blocks. “High
level political commitment on these issues really matters,” says
Alden. “You have for the first time in Europe a clear commitment,
not only in Brussels but among the major leaders in the national
capitals, that this is an economic priority for the European
Union. They see this as an important source of potential growth
at a time when a number of the European economies have been
struggling.”

Alden also suggests that President Obama’s very public backing of
the deal also offers an encouraging signal that economic
imperatives will trump the litany of likely complications. “This
is the first really new, ambitious trade-liberalizing initiative
from this administration,” he says, “and that commitment, which
has now been made personally by the president, really increases
the pressure on his negotiators to try to bring home a deal.”

Ongoing negotiations between Canada and the EU on a trade deal
may also help smooth a path for U.S. talks, according to Alden.
“The Canadians are doing a certain amount of our work for us,
because a lot of these issues are being hammered out in the
Canada-EU negotiations, which are close to conclusion.”

It’s clear, though, that Obama is taking a gamble on the future
of the European Union.

In order for any deal to deliver the promised benefits to U.S.
businesses, the EU must prove a stable trading partner in the
years to come. The crisis that threatened to break up the
monetary union has calmed for the moment, but it is far from
resolved. Right now, the EU’s future remains uncertain. On
Thursday, Eurostat announced that economic growth in the fourth
quarter of 2012 decreased by 0.6 percent. More importantly,
Germany’s economy, the main engine of the European Union, also
shrank by 0.6 percent, the biggest contraction since 2009.

Even so, Obama’s public support for the agreement in his State of
the Union amounted to a vote of confidence that Europe had
weathered the worst of the crisis and was now a partner in
growth, says Peter Sparding, a transatlantic fellow in the German
Marshall Fund’s Economic Policy Program. “From the European side,
this was a huge thing. There were some in Europe who were afraid
of losing the close attention of the United States,” Sparding
said. “This was a signal that the United States is still invested
in the old Cold War ties. It calmed some nerves in Europe.”

Raising Global StandardsIf a trade pact is
reached, it could also have broader global repercussions,
creating de facto worldwide standards for products and
agriculture that could force countries like China to improve
their manufacturing practices in order to compete in Europe and
America. “We need to work together on regulatory issues in terms
of setting standards that will be standards for the global
marketplace,” says the Atlantic Council’s Burwell.

At the same time, removing tariffs, as envisioned in the
agreement’s framework, would stimulate economic growth. Tariffs
between the trading partners are already low, at an average of
about 4 percent, but eliminating them altogether could help
U.S.-based multinationals. “A lot of the tariffs hinder major
companies like Procter & Gamble, Unilever and car companies
who are shifting goods across the Atlantic,” Burwell says. “The
less they have in tariff fees, the more they have for investment
and job creation.”

Business leaders and the U.S. Chamber of Commerce, which doesn’t
typically get enthusiastic about international trade deals,
praised the effort. “For the sake of jobs and growth, it’s time
to forge a bold, new trade pact with Europe,” said Chamber of
Commerce Chairman Thomas Donohue. “The stars are finally
aligned.”